Buy Opportunity On Organic Growth Visibility. Ben Klieve, CFA, Analyst (561)

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1 Apr 03, 2017 Defense AAR Corp Buy Opportunity On Organic Growth Visibility NYQ AIR Buy Initiation Current Price $33.63 Target Price $40.00 Market Capitalization 1.15B Shares Outstanding 34.33M Float 31.25M Institutional Holdings 94.10% 12-month Low/High $21.78/$38.75 Average 90-day Volume 155 Fiscal Year End May 31 Revenues ($ MIL) Period 2016A 2017E 2018E Q A 404.8A 428.2E Q A 423.8A 508.1E Q A 446.7A 543.5E Q A 475.0E 583.7E 1,425.0A 1,474.1E 2,063.5E Unique Opportunity In the Aviation Market. AAR Corporation represents a unique investment opportunity within the aviation market as an outsourcing alternative to commercial and government customers with distinct leadership in the maintenance, supply chain and airlift subsegments of the market. Commercial Market With Long Term, Sustainable Growth Potential. Projected long term growth in both miles flown and the size of the domestic and international commercial fleet, plus the addition of market share from in house maintenance services, provides AAR with sustainable growth potential within their commercial end markets. Government Airlift Markets Stabilizing. Declining war related revenues appear to have stabilized, and a ten year award through the State Department s INL/A division is expected to ramp in the Fall of 2017, contributing a projected $300 million of annualized revenue, representing a 15-20% incremental gain. Positive Top And Bottom Line Outlook. We expect momentum seen thusfar in fiscal 2017 to continue into fiscal 2018, with 18% revenue growth and 32% earnings growth estimated due to the ramping of several recently awarded contracts. The INL/A contract is expected to be the largest contributor, and also presents visible growth into fiscal 2019 as a full year of normalized revenues is expected. Buy Rating On Growth Projections. We initiate a Buy rating and twelve month price target of $40.00, and believe AAR is undervalued based on the visible opportunities for both near term and long term growth. Equity Research Mark Jordan, CFA, Senior Research Analyst, Government Services, Defense Technology (314) mjordan@noblecapitalmarkets.com Ben Klieve, CFA, Analyst (561) bklieve@noblecapitalmarkets.com Noble Capital Markets, Inc. Trading: (561) Sales: (561) EPS ($) Period 2016A 2017E 2018E Q1 0.65A 0.28A 0.35E Q2 0.23A 0.35A 0.41E Q3 0.17A 0.40A 0.54E Q4 0.31A 0.42E 0.61E 1.37A 1.45E 1.91E Refer to the last two pages for Analyst Certification & Disclosures Page: 1 of 16

2 Summary of Investment Thesis/Valuation AAR Corp represents an attractive investment opportunity as a company that is uniquely positioned to capitalize on the projected growth of the global commercial aviation fleet and a government service business seeing signs of a turnaround behind stabilizing revenues and significant contract wins in As a market leader in their Aviation Services businesses, demand for AAR services grows with the size and use of the commercial fleet, both of which have a high degree of long term growth visibility. Demand for Expeditionary Services business is more variable, given the shifting levels of U.S. military and diplomatic engagement overseas. However, the stabilization of revenues following years of war related wind down appears to have arrived, and the ramping of several major contracts provides visibility of a more optimistic near term and long term for the segment. We believe AAR is undervalued based on our fiscal 2018 expectations, which does not include the normalized full year of projected INL/A revenues. Potential upside to our 2018 expectations exists given the ramping of INL/A revenues and other recent awards, which we believe positions the company for outsized growth during fiscal 2018 and We value the company based on an EV/EBITDA multiple of 9.0 times, which represents a modest premium to aviation peers. We believe this premium is justified given the high value add nature of the business, exposure to the areas of projected long term growth, and diversified business which includes meaningful government services revenues. Assuming this multiple, and projected 2018 EBITDA of $168.1 million, we are establishing a twelve month price target of $40.00 per share. Significant highlights are as follows: Well Positioned In Commercial Market With business tied to the size and use of the commercial aviation fleet, AAR is well positioned to capitalize on the projected long term increases in both. Additionally, market share gains in the wide bodied fleet are expected to increase revenues faster than overall market growth. Stabilizing War Related Services Expeditionary Services revenues experienced steady declines in recent years as operations in Iraq and Afghanistan ended, but these efforts appear to have stabilized, suggesting flat organic growth in these areas going forward. Significant INL/A Award To Fuel Fiscal 2018 And 2019 Growth In September 2016, AAR won a ten year contract from the Department of State s International Narcotics and Law Enforcement Air Wing contract (INL/A) which is expected to contribute roughly $300 million in annualized revenues. Revenues should first be realized in the second quarter of fiscal 2018, and be fully ramped by fiscal International Strategy Proving Successful Diversifying international business away from war related initiatives has proven effective, with major awards in calendar 2016 with the Department of State, Air New Zealand, the British Ministry of Defense and flydubai. Restructuring Period Nearly Complete A three year restructuring process, highlighted by the 2015 divestiture of their cargo division for $725 million, is nearly over, resulting in leaner, more value driven Page: 2 of 16

3 business that we believe can more effectively create sustainable value. Balance Sheet Strength AAR maintains a $1.5 billion balance sheet with minimal intangibles, only $158 million of net debt and $580 million of affordable credit available. Management maintains a significant amount of flexibility to pursue acquisitions, continue investing in growth or returning capital to shareholders. Attractive Cash Flow Trends With relatively low maintenance CapEx requirements at $7 to $10 million quarterly, and typical contracts requiring nominal up front investments, the company has strong free cash flow generation potential. Commitment To Returning Capital Dividend issuance at $0.30 per share annually, regular share repurchases and $66 million of available repurchases authorized by the Board of Directors show management s commitment to returning free cash flows to shareholders. Business Overview AAR operations can be most effectively analyzed by their two primary business segments: Aviation Services and Expeditionary Services. Both of these segments serve commercial and government end users, offer products and services and maintain domestic and international operations, but represent the cleanest method to interpret operations. With 85% of fiscal 2016 revenues, Aviation Services has seen consistent mid-single digit growth since Alternatively, Expeditionary Services, with the remaining 15% of 2016 revenues, has seen significant decreases with revenue falling 50% from 2013 to See Figure 1 for detail, with subsegment descriptions below: Page: 3 of 16

4 Aviation Services: Supply Chain (54% of 2016 revenue) This legacy AAR business provides parts trading, distribution and power-by-the-hour component support for commercial and defense airframes. AAR acts as an independent, aftermarket intermediary between the manufacturer and airline, removing the OEM from the supply chain, and thus a layer of margin. This high value add business is lumpy in the near term but predictable in the long term, as their inventory has an indefinite life and supporting airframes have lifetimes of thirty to fifty years. Aviation Services: MRO (31% of 2016 revenue) The Maintenance, Repair and Overhaul (MRO) business provides scheduled and unscheduled maintenance on airframes, landing gear and engine parts. In this subsegment, AAR leverages their scale and expertise to provide services critical to the fleet in a more cost effective manner than commercial airlines and the military can do so internally. The largest provider of MRO services domestically and third largest globally, behind Singapore s ST Aerospace and Hong Kong s HAECO, AAR has six MRO facilities is Oklahoma, Florida, Louisiana, Indiana, Minnesota and Illinois. AAR has recently expanded their domestic capabilities to include the Illinois facility which will primarily service the wide-bodied commercial fleet, and recently won a major award with the US Air Force, detailed on page 6. Expeditionary Services: Airlift (11% of 2016 revenue) The Airlift subsegment provides flight operations for both personnel and cargo, and search and rescue capabilities largely to government and defense end users. This subsegment saw flat growth from fiscal 2015 to fiscal 2016 after years of declining revenues as operations in Iraq and Afghanistan declined. As one of two Airlift providers for the remaining Afghanistan services, a portion of revenues are still realized from areas of combat but long term growth is on the horizon due to the 2016 awards of the INL/A and Falkland Island contracts, detailed on page 6 Expeditionary Services: Mobility (4% of 2016 revenue) Providing mobile shipping, storage and shelter systems for military purposes, this subsegment is highly dependent on war related revenues, but represents a fraction of overall AAR operations. Drivers of Business The Aviation Services segment is highly dependent on the overall activity levels of the commercial airline fleet, with demand for AAR services directly correlated to the size and age of the commercial fleet, along with the overall use of the fleet. With projected long term increases in the size of the commercial fleet, seen below in Figure 2, AAR is well positioned to grow along with the industry. Page: 4 of 16

5 While 9/11 type events will always be a risk, the size of the commercial fleet is expected to grow regardless of temporary shocks. Particular strength seen in the narrow bodied Boeing 737 and Airbus A320neo platforms, with backlog of roughly eight to ten years for each. While these new airframes will initially require less maintenance services than aging counterparts their production will in part replace, as seen in Figure 2, the net impact of this new production will be a positive for AAR. Fleet use is also directly correlated to AAR business, as increased use generates demand for both MRO and supply chain services. With commercial flight services expected to meaningfully rise globally, fueled by developing markets in Africa, Asia and the Middle East that lack ground transportation infrastructure, AAR stands to be a long term beneficiary. Furthermore, MRO services within the commercial wide-bodied fleet provide meaningful potential to capture market share from in-house operations. The long term growth projections and visibility of productions from OEM s Boeing and Airbus provide significant visibility to AAR s long term growth potential. While Aviation Services has seen steady mid single digit growth over the past five years, the Expeditionary Services business was cut in half between 2013 and 2016, as seen in Figure 1, which was attributable to the wind down of Iraq and Afghanistan operations. This segment most directly benefits from the degree to which the United States is engaged internationally, both in military and diplomatic operations. While variable military and State Department operations have created a large delta in this segment from one year to the next, growth and a degree of stabilization is now visible. The ramping of the INL/A award, detailed below, could double segment annualized revenue from fiscal 2016 to fiscal This award, and others recently won, are outside of areas of conflict and thus come with more predictable long term visibility. In the near term, AAR will be driven by the ramping of several key contracts won in Highlights of these Page: 5 of 16

6 awards are as follows: Department of State Bureau of International Narcotics and Law Enforcement Air Wing contract (INL/A) This ten year contract with a ceiling value of $11.5 billion represents the largest award in AAR history. Covering eight to ten competencies, AAR will largely be providing drug interdiction and embassy employee transport in areas of active drug trafficking. While annualized revenues are projected to be roughly $300 million, a sizable annual delta is expected due to the variability of task orders under the award. AAR was able to effectively leverage their comprehensive capabilities to win the award from DynCorp on both price and value, an outcome that DynCorp has bitterly contested, with details shown on page 8 and 9. The protest process is expected to be complete by August 2017, with initial revenues projected in the second quarter of fiscal United States Air Force Landing Gear On March 27, 2017, AAR announced a fifteen year, $909 million fixed price award from the Air force for landing gear MRO and supply chain management for the entire C-130, KC-135 and E-3 fleet. Like the INL/A contract, this award combines multiple AAR capabilities to simplify the government s supply chain. Annualized revenues of roughly $60 million are expected to begin in the second quarter of fiscal United Kingdom Ministry of Defense Falkland Island Search and Rescue This five year, $125 million award announced in March 2016 represents a follow-on to a ten year, $275 million award from the Ministry in January Tasked with providing Search and Rescue, passenger and cargo transfer, this award will provide meaningful long term visibility to the Expeditionary Services business along with needed diversification away from war related revenues. Other Awards Other major contracts have been awarded in the Aviation Services segment with Air New Zealand, South African Airways and flydubai in recent quarters, with financial details not disclosed. Strategic Overview AAR is approaching the end of a three year restructuring effort, where management narrowed the strategic focus towards their industry leading services businesses. The Telair cargo division was subsequently divested in 2015 for $725 million, with proceeds used to pay down debt and fund share repurchases. Along with smaller divisions that have been discontinued, efforts are ongoing to identify underperforming activities like the KC-10 program, which was recently lost in a recompete due to AAR s bidding on value add rather than as the low cost provider. The company is effectively positioned to capitalize on their value add services looking into fiscal 2018 and beyond as a result of these restructuring efforts. Overall, management has domestic and international growth strategies with a clear focus on creating sustainable, value added growth by leveraging their expertise in growing end markets. In addition, the focus is within markets that their scope can be effectively leveraged, particularly in their Aviation Services segment where chasing top line growth in the form of lower margin rotary-wing and low volume business jet markets Page: 6 of 16

7 does not take place. Additionally, domestic operations have recently expanded to include an Illinois facility that will focus on wide-bodied aircraft, a market that AAR will seek to capture market share from in-house operations of commercial airlines. Management s international growth strategy is equally clear, with a focus on commercial airlines in high growth developing markets like the Middle East (flydubai) and Africa (South African Airways). Meanwhile, government awards in these developing markets are from low risk developed governments like the United States and United Kingdom. We are supportive of management s restructuring efforts and long term growth strategies, and believe in their value generation capabilities. Financial Overview Since the 2015 divestiture of the Telair cargo group, AAR has maintained a very healthy balance sheet. Currently, the $1.5 billion balance sheet is of high quality, with only $150 million of intangible assets and $160 million of net debt. The debt position has ticked up in recent quarters due to investments in inventory needed to facilitate the major aviation services awards recently won. At this debt level, AAR maintains minimal leverage at roughly 1.0 times our estimate of fiscal 2018 EBITDA. The majority of debt is maintained in a revolving credit facility, which currently has $600 million of potential credit available. At current levels, the company bears a variable interest rate tied to the Eurodollar Rate plus a 100 to 200 basis point spread. Management has the balance sheet flexibility needed to pursue accretive acquisitions, organic business development efforts, or to continue returning capital to shareholders. Despite their position in the traditionally asset heavy aviation sector, AAR is well positioned with much of their cash spend on working capital needs rather than CapEx. At $7 to $10 million of normalized quarterly CapEx, the company is a strong free cash flow generator, with fiscal 2017 free cash flows projected to be $2.50 to $2.75 per share. However, the nature of many of their contracts calls for inventory investment before meaningful revenues are recognized. Given the various awards described above, $103 million, or $3.00 per share, has been invested into working capital and long term parts inventory through the first three quarters of fiscal With revenues generally delayed two or three quarters after contracts are announced, we project this spending level to taper off and be offset by the ramping of contracts in the near term. Meaningful efforts of returning capital to shareholders has taken place in recent years. Since 2011, a $0.30 per share annual dividend has been declared quarterly, representing a modest yield just below 1%. However, significant levels of repurchases have reduced the sharecount by 15% since the Telair divestiture, with modest quarterly repurchases roughly offsetting option creep thusfar in fiscal The existing repurchase authorization has $66 million remaining, providing meaningful potential to return capital to shareholders. Near Term Expectations Highlights of our forecast for operations from fiscal 2017 through fiscal 2019 are as follows: Fiscal 2017 Expectations: On a May fiscal year, the company has reported three quarters of fiscal 2017, and Page: 7 of 16

8 thusfar reported strong financial results. We expect more of the same in the fourth quarter, which is the seasonally strongest quarter given commercial airlines demands for MRO services to be completed in advance of the summer travel season. We project $475 million of fourth quarter revenues, bringing fiscal 2017 revenues to $1.75 billion. We estimate operating margins to tick up 20 basis points from the third quarter to 5.0%, and earnings of $0.42 per share for the quarter, or $1.45 annually. Fiscal 2018 Expectations: Most critical to fiscal 2018 will be resolving the protested INL/A award, which is expected to occur late in the first fiscal quarter. Should this occur as expected, we estimate the ramping of services to begin in the second quarter. With roughly $300 million of annualized revenue expected, we include revenues of $60 million, $70 million and $80 million in our estimates for the second, third and fourth quarters, respectively. Management has not given financial guidance of this award given the ongoing litigation, but we believe this estimate is both reasonable and conservative. We project this award to be roughly a 60/40 split between Airlift services in the Expeditionary Services segment, and MRO services in the Aviation Services segment. Excluding the INL/A award, we project Expeditionary Services revenues to be roughly flat, and for momentum to continue in Aviation Services with 7% growth. Including the INL/A award, we project annual revenue growth of 18% from $1.75 billion to $2.06 billion, and earnings growth of 32% from $1.45 to $1.91 per share. Top line growth is also expected to include initial revenues in the recently won Air Force award, which we project to contribute roughly $35 million to the top line in fiscal Ramping of other awards commercial awards, and overall growth in the markets, will also contribute to what we project to be a very positive year. Fiscal 2019 Expectations: Assuming no additional major awards, fiscal 2019 could represent the first full year of fully ramped awards that have been won in recent quarters, and could include an additional $100 million and $25 million in revenue from fiscal 2018 contributed by the INL/A and Air Force awards, respectively. We believe this is a reasonable expectation, and along with continued growth in the market could bring top line growth of 10% to 12% on the year from an already strong While it is too early to fully model fiscal 2019, we expect this to be a very positive year and represent AAR s long term value generation capability. INL/A Litigation Following the September 2016 award of the INL/A contract, DynCorp, the losing firm, has taken aggressive action against AAR in an attempt to retain the award. While the protest process is a natural part of the government services industry, we view DynCorp s actions a uniquely aggressive scorched earth strategy. See below for a brief summary of legal proceedings: Initial Protest DynCorp initially protested the outcome of the recompete, which was denied by the Government Accountability Office in December This is natural part of the services industry. OIG Investigation DynCorp submitted a letter to the State Department in May 2015 claiming that AAR Page: 8 of 16

9 misappropriated trade secrets in connection with the INL/A proposal. The Office of Inspector General (OIG) conducted an eighteen month investigation, and announced in February 2017 along with the Department of Justice that they will not take any action against AAR. Court of Federal Claims Proceeding Following the December 2016 result of the initial protest, DynCorp filed a second protest with the Court of Federal Claims, which was remanded back to the State Department. In March 2017, the State Department reaffirmed their initial findings that there was no evidence that AAR engaged in any nefarious behavior as a part of the INL/A proposal. A final ruling is expected to occur on or th before August 9, 2017, at which point the transition of services from DynCorp to AAR can begin. DynCorp International LLC vs AAR Airlift Group, Inc In November 2015, AAR requested a dismissal of a complaint filed by DynCorp that AAR misappropriated trade secrets in connection with the INL/A proposal. This request was granted by the federal court in January DynCorp subsequently appealed the decision to dismiss, which was then dismissed in November The federal court has established trial date of April 2018, and AAR believes the lawsuit is without merit. Management Overview As noted above, we believe management has developed a clear value add strategy, and has effectively positioned the company in high growth areas of the aviation market. Along with an effective capital deployment, M&A and international expansion strategy, we are confident in the ability of the management team to create sustainable shareholder value. Also of note is the stability within the team, with only two CEO s since the company was incorporated in A summary of management biographies is as follows: David Storch Chairman, President and CEO Mr. Storch joined AAR in 1979 with responsibility for developing the Company s aircraft engine business. Through his leadership and industry expertise the business flourished and, in 1987, Mr. Storch was named President of the AAR Trading Group. He became President and Chief Operating Officer in 1989 and, in 1996, he assumed the additional role of Chief Executive Officer. Mr. Storch was named to the additional post of Chairman of AAR CORP. in October 2005 and under his leadership, AAR was named One of The Most Trusted Companies by Forbes magazine. Mr. Storch was also named an Ernst & Young Entrepreneur of the Year in Mr. Storch serves on the boards of publically held companies, Kemper Corporation and KapStone Paper and Packaging Corporation. He also serves on the board of the Smithsonian National Air & Space Museum. He is currently a member of the Commercial Club of Chicago and the Economic Club of Chicago. In June 2016, Mr. Storch was added to the Royal Aeronautical Society s (RAeS) as a Fellow, the highest level of membership recognized by the society. Mr. Storch holds a Bachelor of Arts Degree from Ithaca College. Page: 9 of 16

10 Timothy Romenesco Vice Chairman and CFO Mr. Romenesko recently held the title of AAR s Vice Chairman and Chief Operating Officer, Expeditionary Services. From 2007 to 2015, he was AAR s President and Chief Operating Officer responsible for maximizing performance and implementing the Company s strategies for growth. Prior to that, he held the role of Vice President and Chief Financial Officer for 15 years, overseeing the Company s financial and accounting operations, with responsibility for AAR s treasury function, credit rating, tax policies and investments in manufacturing, information technology, acquisitions and capital market activities. Mr. Romenesko joined AAR in 1981 and performed various financial roles for several AAR operating units. He was named Corporate Controller in 1991 and Chief Financial Officer and Treasurer in Prior to joining AAR, Mr. Romenesko was with Marshall & Ilsley Bank. Mr. Romenesko earned his BA from St. Norbert College and his MBA from DePaul University. He holds a CPA designation in Illinois and is a member of the Financial Executives Institute and the Illinois CPA Society. He served as trustee on the Board of Directors of St. Norbert College from 2005 to John Holmes COO of Aviation Services Mr. Holmes oversees the business units that comprise AAR s Aviation Services segment. These groups include the 1MRO network of heavy maintenance facilities, component repair shops and landing gear overhaul facility. In addition, the supply chain group includes engine and airframe parts supply, OEM parts distribution, commercial and government supply chain programs, along with Airinmar repair management. Holmes has led the double-digit growth of this growing group that serves commercial airline and government customers around the world. Mr. Holmes joined AAR in 2001 as Director of Mergers and Acquisitions. He became General Manager of AAR Allen Aircraft parts trading in 2003 and assumed responsibility for AAR Distribution in In 2005, he merged the two groups into AAR Allen Asset Management to achieve greater operational efficiencies, expand AAR s service offerings and improve customer service. In 2011, he led the acquisition of Airinmar to strengthen AAR s program offering. In 2012, Mr. Holmes assumed responsibility for the Company s Defense Systems and Logistics business and was appointed Group Vice President, Aviation Supply Chain. In 2013, he took on responsibility for the Company s engine parts business, and in 2015 he was named COO of the Aviation Services segment. Prior to joining AAR, Mr. Holmes spent time in investment banking and private equity. Mr. Holmes earned a bachelor's degree in finance from the University of Illinois and an MBA from the University of Chicago. Page: 10 of 16

11 Company Profile AAR Corp is a diversified product and service provider to the global commercial, government and defense aviation markets. Founded in 1951 and headquartered in suburban Chicago, AAR has recently undergone restructuring efforts to focus the business on their two industry leading segments: Aviation Services, which provides supply chain management, parts trading and MRO services, and Expeditionary Services, which provides airlift services and mobility products. Valuation Summary We are establishing a Buy rating and twelve month price target of $40.00 per share on AAR. We assume an EV/EBITDA multiple of 9.0 times, which represents a premium to smaller peers in the aerostructures business due to their high value add business, exposure to the higher growth commercial segment of the market, and diversified business with operations in the government services industry. Our price target assumes fiscal 2018 EBITDA of $163.5 million and a reduction in net debt from $160 million ending the third quarter of 2017 to $100 million by year end 2018 due to improved cash flow projections from the ramping of contracts. Investment risks include: volatility in the commercial aviation industry, U.S. government budgetary challenges, geopolitical risks from operations in developing markets, variable DOD contracts in areas of conflict. Page: 11 of 16

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15 GENERAL DISCLAIMERS All statements or opinions contained herein that include the words "we", "us", or "our" are solely the responsibility of Noble Capital Markets, Inc. ("Noble") and do not necessarily reflect statements or opinions expressed by any person or party affiliated with the company mentioned in this report. Any opinions expressed herein are subject to change without notice. All information provided herein is based on public and non-public information believed to be accurate and reliable, but is not necessarily complete and cannot be guaranteed. No judgment is hereby expressed or should be implied as to the suitability of any security described herein for any specific investor or any specific investment portfolio. The decision to undertake any investment regarding the security mentioned herein should be made by each reader of this publication based on its own appraisal of the implications and risks of such decision. This publication is intended for information purposes only and shall not constitute an offer to buy/sell or the solicitation of an offer to buy/sell any security mentioned in this report, nor shall there be any sale of the security herein in any state or domicile in which said offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or domicile. This publication and all information, comments, statements or opinions contained or expressed herein are applicable only as of the date of this publication and subject to change without prior notice. Past performance is not indicative of future results. Noble accepts no liability for loss arising from the use of the material in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to Noble. This report is not to be relied upon as a substitute for the exercising of independent judgement. Noble may have published, and may in the future publish, other research reports that are inconsistent with, and reach different conclusions from, the information provided in this report. Noble is under no obligation to bring to the attention of any recipient of this report, any past or future reports. Investors should only consider this report as single factor in making an investment decision. IMPORTANT DISCLOSURES This publication is confidential for the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or discussed to another party, without the written consent of Noble Capital Markets, Inc. ("Noble"). Noble seeks to update its research as appropriate, but may be unable to do so based upon various regulatory constraints. Research reports are not published at regular intervals; publication times and dates are based upon the analyst's judgement. Noble professionals including traders, salespeople and investment bankers may provide written or oral market commentary, or discuss trading strategies to Noble clients and the Noble proprietary trading desk that reflect opinions that are contrary to the opinions expressed in this research report. The majority of companies that Noble follows are emerging growth companies. Securities in these companies involve a higher degree of risk and more volatility than the securities of more established companies. The securities discussed in Noble research reports may not be suitable for some investors and as such, investors must take extra care and make their own determination of the appropriateness of an investment based upon risk tolerance, investment objectives and financial status. Company Specific Disclosures The following disclosures relate to relationships between Noble and the company (the "Company") covered by the Noble Research Division and referred to in this research report. Noble intends to seek compensation for investment banking services and non-investment banking services (securities and non-securities related) within the next 3 months. Noble is not a market maker in the Company. Page: 15 of 16

16 WARNING This report is intended to provide general securities advice, and does not purport to make any recommendation that any securities transaction is appropriate for any recipient particular investment objectives, financial situation or particular needs. Prior to making any investment decision, recipients should assess, or seek advice from their advisors, on whether any relevant part of this report is appropriate to their individual circumstances. If a recipient was referred to Noble Capital Markets, Inc. by an investment advisor, that advisor may receive a benefit in respect of transactions effected on the recipients behalf, details of which will be available on request in regard to a transaction that involves a personalized securities recommendation. Additional risks associated with the security mentioned in this report that might impede achievement of the target can be found in its initial report issued by Noble Capital Markets, Inc.. This report may not be reproduced, distributed or published for any purpose unless authorized by Noble Capital Markets, Inc.. U.S. CLIENTS For purposes of distribution in the United States, this report is prepared for persons who can be defined as "Institutional Investors" under U.S. regulations. Any U.S. person receiving this report and wishing to effect a transaction in any security discussed herein, must do so through a U.S. registered broker or dealer. Noble Capital Markets, Inc. is a U.S. registered broker dealer. RESEARCH ANALYST CERTIFICATION Independence Of View All views expressed in this report accurately reflect my personal views about the subject securities or issuers. Receipt of Compensation No part of my compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed in the public appearance and/or research report. Ownership and Material Conflicts of Interest Neither I nor anybody in my household has a financial interest in the securities of the subject company or any other company mentioned in this report. > NOBLE RATING DEFINITIONS % OF STOCKS COVERED % OF IB CLIENTS BUY: potential return is >15% above the current price 58% 39% HOLD: potential return is -15% to 15% of the current price 26% 5% SELL: potential return is >15% below the current price 0% 0% Additional information is available upon request. Any recipient of this report that wishes further information regarding the subject company or the disclosure information mentioned herein, should contact Noble Capital Markets, Inc. by mail or phone. Noble Capital Markets, Inc. 225 NE Mizner Blvd. Suite 150 Boca Raton, FL Noble Capital Markets, Inc. is a FINRA registered broker/dealer. Member - SPIC (Securities Investor Protection Corporation) Report ID: 9799 Page: 16 of 16